California Retirement System Expresses Opposition to Anthem-WellPoint Merger, Citing Concern Over Payments to Plan Executives

The California Public Employees' Retirement System in a press conference on Monday said it would oppose a proposed merger between Indiana-based Anthem and California-based WellPoint Health Networks health plans because of concerns over proposed executive compensation packages totaling more than $600 million, the Wall Street Journal reports (Fuhrmans, Wall Street Journal, 6/15). The merger, announced last October, would combine the companies under the name WellPoint and create headquarters in Indianapolis. The combined company would have $27.1 billion in assets, 40,000 employees and 26 million members in 13 states, including California. California Assembly Speaker Fabian Nunez (D) last month formed a special committee to investigate the proposed merger in response to concerns raised by several lawmakers and consumer advocacy groups that the state Department of Managed Health Care would approve the agreement without a public hearing. State law does not require a hearing, although the state previously has held public hearings on similar mergers. The proposed merger requires approval from Anthem and WellPoint shareholders, as well as from regulators in the states where the combined company would operate (Kaiser Daily Health Policy Report, 6/10). The 10 other states with direct regulatory authority and the federal government have approved the proposal (Swiatek, Indianapolis Star, 6/15).

Compensation Details
A document filed by Anthem on June 8 with the California DMHC showed that WellPoint executives would be eligible for a combined $147 million to $356 million in bonuses or severance payments after the merger is completed. WellPoint executives would receive a combined $147 million in bonuses if the company retains all 293 executives, and if all executives are dismissed within three years, they would receive a combined $356 million in severance payments. WellPoint spokesperson Ken Ferber said that Anthem would cover the cost of the compensation packages, which would have no effect on operations in California (Kaiser Daily Health Policy Report, 6/9). California regulators in a joint state Assembly and Senate hearing on June 9 raised concerns about the effect that the combined company would have on consumers. At the hearing, state Insurance Commissioner John Garamendi indicated that he might not approve the agreement. Garamendi does not have the authority to block the proposed merger, but he could deny a request by Anthem to purchase Blue Cross of California. Anthem and WellPoint shareholders plan to vote on the proposed merger June 28 (Kaiser Daily Health Policy Report, 6/10).

CalPERS' Criticism
CalPERS officials at the press conference Monday "promised an aggressive campaign" to defeat the merger, including lobbying other investors to oppose the acquisition, requesting the state DMHC to hold a hearing on the legality of the compensation package and asking Institutional Shareholder Services, one of the country's largest proxy adviser groups, to suggest that shareholders oppose the deal, the Journal reports. ISS officials previously recommended that WellPoint and Anthem shareholders approve the deal; however, they have agreed to meet with CalPERS to discuss information regarding the compensation packages. According to the Journal, while it is "unclear how much sway" CalPERS will have on the merger, its opposition "could trigger a last-minute challenge to the takeover" (Wall Street Journal, 6/15). Nearly 25% of CalPERS members are covered by a WellPoint health plan, according to the Indianapolis Star.

Reaction From CalPERS
Phil Angelides, CalPERS board member and state treasurer, asked state insurance regulators to demand a reduction in the executive compensation packages as part of a regulatory review of the deal (Indianapolis Star, 6/15). He said, "It's very clear to us that this bonus, severance and stock-option package, which is egregious by any accounting standards, will come out of the pocket of consumers and shareholders." CalPERS Board President Sean Harrigan said that the proposed compensation package proposal "is the worst example of pigs at the trough" (Wall Street Journal, 6/15). He added that the bonuses and severance pay are a "hugely excessive, outrageous, unbelievable going-away present to [WellPoint] senior management" (Indianapolis Star, 6/15). CalPERS' opposition to the merger "is the latest example of the alliance" between the CalPERS board and Angelides "to use the shareholder clout of state employees' pension funds to pressure companies to improve governance packages," Bloomberg/AP/Los Angeles Times reports (Bloomberg/AP/Los Angeles Times, 6/15).

WellPoint, Analyst Response
But Ferber said that CalPERS is overestimating the compensation package because it tallied both potential severance payments and bonuses for staying (Bloomberg/AP/Los Angeles Times, 6/15). He added that the compensation arrangements were not negotiated as part of the merger and were the result of previous contractual agreements, according to the Journal (Wall Street Journal, 6/15). An unnamed WellPoint consultant last week said that WellPoint's executive payments are projected to be $200 million -- 1.2% of the value of WellPoint's stock value, the Star reports. George Paulin, president of F.W. Cook, an employee compensation firm, said that typical bonus and severance packages in a large corporate merger range from 2% to 3% of the acquired company's stock value, according to the Star (Indianapolis Star, 6/15).